Consumers Confront Difficult Economic Reality

January 14/Chicago/Business Wire -- The U.S. economy has entered the third stage of its unprecedented transformation and will be characterized by shoppers permanently changing several of their most important rituals involved in the consumer packaged goods (CPG) products they select, purchase and use. With volatile and uncertain conditions ahead, consumers are spending with caution -- continuing to define what is truly essential. Despite relief from record breaking fuel prices late in the third quarter, increases in food prices still have shoppers spending more on groceries and getting less. It remains a challenging time for manufacturers who must reinforce the value proposition of their brands without selling out their equity. For retailers, private label continues to be a survival strategy for many consumers, and private label brands continue to evolve in their sophistication, quality and availability.

This is one of the findings in the just released "Transforming Economy 3.0: The Search for Affordable Solutions," created by Information Resources Inc. (IRI). "While the recession is far from over, our new research reveals that we are entering a third phase," notes IRI Consulting and Innovation president Thom Blischok. "The first phase, 'Shocking the System,' was characterized by rapidly rising energy and food prices, and a dramatic weakening of the home mortgage market starting in late 2007."

"This phase was followed by stage two, 'A Refocus on Impact,' during which consumers reacted radically to their imperiled financial situation by extreme belt tightening, even while prices were beginning to stabilize. In the third phase of 'The Lasting Reality,' prices are continuing to level off, financial markets have halted their downward spiral, and many shoppers are backing off their most extreme belt-tightening behaviors."

Shoppers Continue to Struggle
Shoppers remain significantly concerned about how economic conditions are affecting their financial situation. For example, 84% of surveyed consumers with annual incomes of $35,000 or less point to rising food costs as affecting their financial condition in Q3 2008, although this figure is down slightly from 87% in Q2.

Concurrently, surveyed shoppers report they are spending more but purchasing less. In Q3, shoppers paid on average 3.7% more but purchased 2.0% fewer units.

Many shoppers are settling into self-reliance strategies to save money. For example, 45% of shoppers earning $35,000-54,000 agree with the statement, "I go to hair salons or spas less often." This is a slight decrease when compared to the previous quarter, reflecting a slight retreat from earlier, more extreme behavior.

"Lower-income consumers began savings strategies the earliest and practiced them most aggressively as compared to other income groups," adds Blischok. "While other groups are beginning to retreat from aggressive savings strategies, lower-income consumers are either not pulling back at all or doing so more slowly."

Private Label Popularity Based on More Than Price
Private label products continue to be popular with consumers, with dollar share increasing 1% and 0.9% in Q2 and Q3 2008, respectively. However, the attraction of private label results from a combination of quality, variety and convenience, not simply lower prices. Private label purchases grew most rapidly among shoppers earning more than $100,000 annually during Q3.

"The private label phenomenon will continue to be a bright spot for innovative retailers that invest in providing a high-quality, convenient, affordable alternative to shoppers," Blischok continues. "It is also a call to manufacturers to rewire the value proposition they offer shoppers and ensure that all product development, merchandising, pricing and related strategies are closely tied to a well articulated, shopper-centric strategy."

From the January 19, 2009, Prepared Foods E-dition